A man earns today so that he can have a comfortable life tomorrow. Some work for gathering retirement funds, some for buying a home or achieving other short/long-term goals. And through this, everyone keeps looking for the best ways to invest money in India.
Well, that’s how the ideal scenario should be. But life is rarely ideal.
Investing as a habit in India is still in a nascent stage if we compare our population with the amount invested in our stock markets and other avenues.
We still have only 10.4 million active investors in 2020 in a population of more than 1.3 billion.
For us Indians, investment still equals to savings in FDs, gold or idle cash lying in our savings account.
Sadly, ‘real investing’ is seen as a ‘get rich quick’ scheme or a scam by the majority of the population.
Most of us want to invest and grow our wealth, but don’t know how to start, where to invest and what to keep in mind. In this blog, I’ll try to cover a few ideas plus share some common ways to start investing your money for achieving your goals.
Why Should You Invest Your Money?
Whenever I pick up the topic of investment, someone always asks this question: “Why should I invest for the future which is uncertain? I am earning well today and happy with whatever I have.”
Though we all know it’s answer, somehow we remain in a state of denial. We always push ourselves and keep saying – I will start investing one day. But let me share something with you.
The longer you delay, the more you’ll lose. Your hard earned money will be eaten by the devil called inflation.
Did you get the reference from the meme above?
Well, let me explain – inflation makes everything costlier. The goods that you could have purchased for INR 100 two years back, cost 120 (or more) today. And in the future, it will cost more.
Hence, it is important that your money grows more than the rate of inflation in the country.
Despite the best efforts of economists, RBI and the government, the inflation has stayed in a range of 8-10%.
This means your INR 100/- would be valued for INR 90/- one year later and so on.
You need a mechanism to beat this inflation and ensure the value of your money doesn’t erode with time. That mechanism is known as investing.
The fundamental rule of thumb related to investment is that you should invest in an instrument that gives you more return than the rate of inflation in the country.
You should invest to beat the inflationary pressure and ensure you can afford the same lifestyle tomorrow that you are used to today.
When Should You Start Investing?
“I’ll invest when I have some spare money. Right now, I need to buy x, y and z!”
Heard your mind saying this over and over again?
Well, I’d only say ‘Kaal kare so aaj kar, aaj kare so ab…’
Not because I am a fan of doomsday (though we are all living in doomed times) but because there is actually science behind starting early when you invest.
I won’t plaster this space by saying the same thing you’d have already found about compounding and Einstien calling it the eight wonder of the world.
Instead, I’d show you an example of how compounding gives you an amazing advantage over people who start investing late.
As you can see, the cost (or loss) of delaying your investment is quite high.
That’s why you should start as early as possible. Ideally, right from your first salary cheque.
Longer your investment tenure, higher the compounding benefits, and thus returns.
How should a person in their early 20s invest their money?
“I’ve just started my career. How can I invest with so little salary that’s barely enough to sustain a decent lifestyle?”
I know, I know… That’s what you have in mind. You’ve just started (and paise bachane ke liye to zindagi padi hai).
I also began working in my early 20s and by 24, I started investing. I had my own demat account and had some money in mutual funds. All this when I was just earning INR 8000/- fixed salary (plus some money from freelancing) in Delhi. So, you can imagine how little I had.
But still, I began – with INR 1000 per month invested via an SIP in an equity mutual fund.
Yes! That’s what you need to get started. Nowadays, you can start with as little as INR 500/-. The goal here is not to have a lot of money when you begin, but to cultivate a financial and investment discipline that will go a long way in making you wealthy in the future.
Here are a few habits (and tricks) that will help you start your investing journey:
- Set Aside Money for Investing Before Spending
It’s salary day!
You’re eagerly waiting to order that classy pair of airpods to flaunt, treat yourself with a big meal in the evening and plan a party over the weekend.
But wait…..! You shouldn’t spend your salary right away.
Instead, follow a neat trick if you want to keep enjoying ‘moments of glory’ for the rest of your life.
Learn to set money aside immediately for investing as soon as you receive your salary. This simple trick would help you inculcate financial discipline into your life.
Open another bank account and transfer an amount of your salary to that account. And forget about it. Use this account only for investing your money into different avenues.
Think of it this way – you earn only the amount you get after setting aside the money for investing.
- Adopt the 30. 30. 30. 10 Rule
Now you’d ask, how much is good to begin with. Well, for this, I have a formula that’s a variation of a popular budgeting tactic. Here it goes:
Salary (100%) = Savings (30%) + Debt Servicing/Repayment (30%) + Living Expenses (30%) + Luxuries (10%)
You should put aside 30% of your in hand salary for savings and investment, 30% for repayment of your education loan (or if your parents have a house loan), 30% for general living expenses – like groceries, food, utility bills, and remaining 10% you can use for fulfilling your wishes. After all, we all deserve a treat, now and then.
If you don’t have any repayment obligation, you can use that sum for topping up your investments (or use it to build an emergency fund too)
Remember, this rule best works when you’re single or just a young couple as living expenses rise with children. But this is a good plan to begin with. It will give you stability, fulfill your wishes and help you start your investment journey.
- Do Systematic Investments
If you’re not very disciplined (or think you won’t be able to do it), there’s another way to begin for you.
You can start via a systematic investment plan (SIP). An SIP is an automatic deduction from your account (like EMIs) that gets invested in the mutual fund of your choice.
You’d have seen a lot of mutual fund sahi hai ads by now. Right?
With an SIP, you can start from as low as INR 500/- and it will be auto debited and invested at a date of your choice.
Even if you can take out money before spending, you should start SIPs on your alternate account and sit back while little drops get accumulated into a big mutual fund portfolio.
- Create a Goal-based Financial Plan
Well, if you don’t know your destination, you’d never reach, no matter how much fuel you have in your car.
Same is the case with your investment too. If you don’t know your goal and don’t tie up money to a goal, you’d lose interest and may stop investing. Also, without a goal, you’d not know how to realize your profits and achieve your life goals, too.
So, always have a goal-based financial planning and investing approach.
Want to buy a car in 5 years? That’s a short term goal.
Want to retire with 10 crores in your bank account? That’s a long term goal.
Want to put in money for downpayment of your home 3 years down the line? That’s a goal.
You need to tie your money and investment to the life events via a goal-based financial plan. Don’t get too into the details right now. Just learn to tie your money.
And don’t forget the money you need to achieve the goal in the future, would be considerably more than what you need now. (Remember, the devil called inflation). So, you’d need to account for inflation, the returns you expect and the amount you need to finalize your plan.
I’d come up with a separate blog on goal based financial planning where I’ll explain how to create a simple plan for yourself.
Everything depends on your goals – the amount you should invest, the money you need in the future and the effort you need to do now. Not only in investing, but in life too. So, practice goal-based investment planning for yourself.
You’d need a lot of money in the future- that’s no secret. But if you don’t begin today, you’ll keep chasing money for the rest of your life. (and might have to take some tough decisions). Hence, it is good to learn the basics of investing and how to start with it, the right way.
Hope this blog cleared out some fundamentals and will help you in your investing journey.